Today's Key Points

Daily Forex Fundamentals | Written by Danske Bank | Aug 19 08 07:59 GMT |
Danske Daily

* Fannie Mae and Freddie Mac tumbled yesterday. Financial fears have resurged. Equities are down, treasuries perform, USD stronger
* Hurricane Fay rages outside Florida. Oil is down to 112 USD/barrel
* Light data agenda today. PPI and housing starts from the US and ZEW survey from Germany. No important data out of Scandinavia

Markets Overnight

Here we go again. An article in the Barrons magazine yesterday arguing that Fannie Mae and Freddie Mac would most likely wipe out investors sent the two housing giants tumbling more than 20%. Both stocks reached new lows and obviously brought the US stock indices with them.

The S&P500 and Nasdaq both ended the day down by 1.5%. The malaise has spread to Asia and so far this morning the Nikkei index has lost 2.6%.

The resurgence of immediate fears for the US housing giants has brought with it the usual knee-jerk reactions. Treasury bonds are beneficiaries to flight to quality and the 2yr US government benchmark has seen its yield decline to 2.31%, the lowest level since mid-May, leaving the US yield curve steeper.

The USD has appreciated and is currently trading below 147 against the EUR. The JPY and the CHF have also appreciated, whereas the SEK and the NZD have seen a slight depreciation.

It should also be noted that the price of oil has come back down to 112 USD/barrel. However, hurricane Fay is still raging off the Florida coast, so we expect continued volatility in the oil price in the near term.

Finally, to tie in with the crises at Fannie Mae and Freddie Mac we note that housing in the real economy also continues to linger in the doldrums. The US NAHB housing index yesterday evening came out at 16. A tied all time low reading.
Global Daily

EUR/USD continues to be soft on the downside. And that has turned into a European issue rather than an American one. Yesterday, data showed the biggest euro zone trade balance deficit recorded since mid-2006. Today's key releases will probably not provide much help for the struggling euro as the ZEW numbers are likely to show a worsening of German business conditions. If that holds true, more downside potential can open up. Things are, however, moving a bit fast while we look for an upward correction. But this requires an end to the negative European data stream - an end that probably is nowhere near.

EUR/USD continues to be soft on the downside. And that has turned into a European issue rather than an American one. Yesterday, data showed the biggest euro zone trade balance deficit recorded since mid-2006. Today's key releases will probably not provide much help for the struggling euro as the ZEW numbers are likely to show a worsening of German business conditions. If that holds true, more downside potential can open up. Things are, however, moving a bit fast while we look for an upward correction. But this requires an end to the negative European data stream - an end that probably is nowhere near.

The ZEW indicator has fallen strongly and is at a historically very low level and much lower than other surveys. The level has thus not been a good guide for the level of for example the German ifo. The changes from month to month, however, are often a good guide for changes in ifo. The only question is whether the ZEW indicator has reached such a low level now that it can hardly fall further contrary to for example ifo? We look for a broadly unchanged number at -64, slightly below consensus of -62. We would not expect much market impact from such a reading, though.

US PPI will give some more input to the inflation equation. Commodity prices have eased lately and it should start to feed into PPI soon. It may be too early to see it this month, though. We as well as consensus look for a rise in core PPI of 3.2% y/y. Headline PPI is expected to rise a much stronger 9.0% y/y as it is held up by energy and food prices. The speech from Fed's Fisher tonight may also be interesting. Recently he has been the only one dissenting being in favour of a hike, but there has been some softening from the Fed hawks recently as commodity prices have eased and growth deteriorated again.

Markets are more likely to trade on financial news than macro figures today as financial jitters continue to be on the agenda.

Danske Bank
http://www.danskebank.com/danskeresearch

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